Healthcare Market Is Tight But Not Unworkable

Healthcare real estate has become a more widely recognized asset class by both the domestic and international investment community. And despite uncertainty over the future of healthcare reform such as the repeal of the Affordable Care Act, value-based reimbursement and changes to healthcare delivery setting, demographics will dictate increasing for healthcare services for years to come.

A panel titled: “The “Real Deals” of 2017: Lessons Learned and Implications for What’s Next” at RealShare Healthcare, held here on Thursday, dove deeper into that discussion, noting that the increasing demand for modern, well-located space and a corresponding expansion of investor interest in the asset class and the pressures on operational efficiency and the rise in potential investors have lead many health systems and physician groups to monetize their real estate assets.

When moderator Gino Lollio, senior director of IPA, a division of Marcus & Millichap, asked panelists about how they source their opportunities—whether it be a buy, sell or equity placement—Jason L. Signor, CEO and partner at Caddis, said that senior housing aside, while they will always pay a broker, they prefer to go direct on acquisitions. For developments, while Caddis has won its share of RFPs, they prefer to go to relationships.

“It may not be from the client, it may come from a former partner, and we try to reciprocate that.”

Darryl E. Freling, managing principal of MedProperties, said that his firm is invested in a lot of ground up development and doesn’t recall of development through an RFP process.

“We always go through direct and have developed a lot of our own provider relationships.”

In terms of acquisitions, whether value add or stabilized acquisitions, MedProperties prefers to do an off-market deal.

“As a seller, and we are often sellers, we prefer to sell through a qualified broker because you get better pricing and it is a competitive process,” said Freling. “As a buyer, we don’t mind competing, but everyone looks at assets a little different. We do a lot of post-acute assets, and a lot of buyers don’t.”

As for how that compares to the past, panelist Ann Atkinson, SVP of acquisitions at Healthcare Trust of America Inc., said that there are way more brokers now than there were five years ago. And Signor said that today’s market is much more efficient than in the past.

“The efficiency has been the biggest change and in the last three or four years, the market has tightened.”

Jim McMahon, SVP of Capital One Healthcare, said that his firm has a lot of direct relationships and are really indifferent in how a deal comes to them.

“We are looking to drive volume and provide debt to the industry.”

As for competition, Signor said that healthcare has changed from being an opportunistic investment to being a core investment.

“I think the big thing we have seen is new competitors. From a development perspective, we are competing with the core build-to-suit giants. The equity coming in is now core equity… It is overseas. It is from pension funds who have never looked our way before and now we are getting calls from them on a weekly basis.”

Atkinson said that there is a big disparity today between quality and a lack of overlap between some of the buyers that might be looking to find different assets with different risks and different yields.

“They aren’t competing for the same types of assets. There is a big difference in pricing and buyer profile.”

According to Freling, the quality assets are very competitive.

“On a risk adjusted basis, healthcare real estate is still probably less expensive than some of the other food groups but that gap is narrowing. It is very competitive on the core side.”

But Freling pointed out that there are a lot of A-type assets that can be bought, that were maybe improperly marketed, or are just a unique situation, and they can be turned into a core asset.

“There are relatively less players with the expertise or willingness to go after value-add.”